Last year credit-card holders needlessly gave banks an extra $1.8 billion in interest payments, analysts have calculated, using Reserve Bank data.
"The figure demonstrates that too many people are hanging on to high-cost cards that don't suit their needs and are paying a lot," says Catherine Wolthuizen, executive director of Consumer Law Centre Victoria.

Times have changed since 1974 when Bankcard was the only card available in Australia. Today more than 250 cards are on offer with various rates and inducements.

Consumer groups say choosing the right type of card to suit personal repayment habits could save tens of thousands of dollars.
According to the RBA, there are 12.5 million card accounts in Australia with an average interest rate of 16.75 per cent on a total balance of $23.65 billion.

With an average balance of $2600 per card, at least a third of holders are rolling over, or "revolving", the monthly balance, paying only the minimum amount and lots of interest unless they've been smart enough to switch to one of the new, lower-interest cards, says independent analyst, Mike Ebstein of MWE Consulting.

Another third, known as "transactors", pay their balance in full within the interest-free period and about 40 per cent sometimes do and sometimes don't - that is, they are "failed transactors".

Ebstein says picking the right card to suit your needs is the key to making the card benefit you, rather than the bank.

There are two basic types of cards: high interest rate cards that offer rewards, like frequent flyer points and interest-free days, and low-cost cards with no loyalty programs or interest-free periods.

Mike Ebstein says recent RBA reforms to how banks pay each other for processing purchases diluted the value of reward-based cards, while making the low-rate alternatives more attractive.

He says many consumers have stuck with their high-rate card out of inertia and the appeal of the reward scheme without realising they are now more expensive to rack up.

Richard Shepherd, head of credit cards at BankWest, says the $1.8 billion "overpayment" is happening because many are paying unnecessarily high-interest rates as they chase loyalty points for rewards that are not only now more expensive but are also often out of their reach.

"Australians are making poor credit card choices," he says. "They don't know their interest rates, don't read their statements, have had the same high rate for 10 years and more importantly, don't know they're paying too much."

It's not just about interest rates. Fees charged by some high-rate cards have soared by more than 100 per cent over the past three years as banks have attempted to recoup revenue lost as a result of the RBA's rule changes, says Citigroup banking analyst Craig Williams.

"While customers that revolve balances have been the clear winners from the increased competition in the market (which has driven some rates lower), the traditional transactor seeking frequent flyer points is now much worse off," he says.

While each type of card has its place in the market, Wolthuizen says, consumers should be utterly honest with themselves when picking a card, rather than aspiring to a lifestyle they can not afford.

She says it is often cheaper to have a low-rate card and use the savings in interest to purchase the loyalty reward in cash.

Ebstein says to make use of the benefits of a high-rate card, people must spend at least $20,000 a year and pay off the full amount within the interest-free period. "If you rarely revolve then the interest rate is academic and you should be looking for a card that maximises the interest-free period and has a low annual fee," he says.

"If you are revolving the interest free period is irrelevant and you should have a low-rate card."

Still, simply applying for the lowest-rate card in the market is not the answer, says Andrew Willink, managing director of independent researcher Cannex.

He says consumers should examine all aspects of a card before applying, including annual fees and the minimum monthly repayment.
Cannex has found marked differences in the costs of low-rate cards, measured by the total amount a credit cardholder has to fork out to repay a $2600 balance (see table).

For high-rate cards, Cannex has developed a Reward Return measure that can be used to directly measure the cost of belonging to a card reward program.

"If the reward return is less than the annual cost of the program, then the cardholder spending just $1000 per month or less is not deriving adequate value from the program," Willink says.